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Is a Tesla Model S Recall Likely?

The last 30 days have been a wild ride for Tesla Motors (NASDAQ: TSLA) stock. After an exuberant rise of about 500% in just 12 months, Tesla's stock has fallen about 30% in about one month. While conservative guidance for the fourth quarter certainly had something to do with the sell-off, the fires are also a likely source. But is there really any reason for Tesla investors to be concerned?

Model S fire in Tennessee. Source: Tesla Motors' official blog.

Reviewing the factsSure, the National Highway Traffic Safety Administration opened up another investigation "to examine the potential risks associated with undercarriage strikes on model year 2013 Tesla Model S vehicles." But it's important to keep in mind that the investigation was opened up at Tesla's request.

What's more, Tesla did not request the investigation out of worry for its vehicles. Instead, Musk has explained in a company blog post that Tesla has requested the NHTSA to get involved in order to prove a point.

Given that the incidence of fires in the Model S is far lower than combustion cars and that there have been no resulting injuries, this did not at first seem like a good use of NHTSA's time compared to the hundreds of gasoline fire deaths per year that warrant their attention. However, there is a larger issue at stake: if a false perception about the safety of electric cars is allowed to linger, it will delay the advent of sustainable transport and increase the risk of global climate change, with potentially disastrous consequences worldwide. That cannot be allowed to happen.

Pulling some data from the National Fire Protection Association gives us further color on just how exaggerated the overwhelming number of negative media responses to Tesla's fires has been.

In 2012, the NFPA reported:

172,500 highway vehicle fires

300 civilian vehicle fire deaths

800 civilian vehicle fire deaths

One highway vehicle fire every 182 seconds

Despite the overwhelming number of fires resulting from gasoline vehicles, Musk didn't hesitate to point fingers at the media's overreaction:

However, the three Model S fires, which only occurred after very high-speed collisions and caused no serious injuries or deaths, received more national headlines than all 250,000+ gasoline fires [extrapolating from 2012 NFPA data to paint a picture of a period that compares to the timeframe that the Model S has been in production] combined.

Conversely, extrapolating form the Model S data so far, drivers and occupants have a 0% chance of being hurt in an accident that results in a battery fire, and a 0% chance of death or serious injury in any Model S accident, period (despite "multiple high-speed accidents").

Sure, Musk acknowledges that "at some point, the law of large numbers dictates that this, too, will change." On the other hand, however, there are enough cars on the road for Tesla's stats to remain impressive. As Musk pointed out, there is just one fire in every 6,333 Model S vehicles on the road (using the 19,000 total vehicles Tesla reported it has sold in the company's third quarter), compared to one fire for every 1,350 gasoline cars.

After explaining that a gasoline tank has 10 times more combustion energy than Tesla's battery packs, Musk couldn't help from holding back his sarcasm:

It is also why arsonists tend to favor gasoline. Trying to set the side of a building on fire with a battery pack is far less effective.

Is a recall likely? Not at all. Even though there is no substantial evidence of any design defect, Tesla has taken actionable steps to address the potential for battery fires anyway. Even more, Musk has even specifically addressed concerns of a product recall, saying that "there's definitely not going to be a recall" during a recent New York Times DealBook conference in New York earlier this month. And it's important to remember that this is the safest car to ever be sold in the U.S. we're talking about.

But given Tesla's meteoric rise to $194.50 per share, and its extremely forward-looking premium, the fires may have simply been the chosen medium for a much-needed sell-off that would inevitably come anyway. Whether they were the direct cause of much of this sell-off or not, shares are beginning to look fairly reasonable for the first time in a while. That said, I'd still like to see a larger sell-off to provide a bit of a margin of safety before I would call Tesla a buy.

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Mistake 1: "But it's important to keep in mind that the investigation [into potential risks associated with undercarriage strikes] was opened up at Tesla's request."

Fact: The head of the federal government’s automotive safety arm first noted that during a hearing on Capitol Hill this week, later repeating that the decision to launch the investigation was made “independently,” with no feedback from Tesla or its CEO, despite Musk’s blog claiming the company “requested” a safety probe “as soon as possible into the fire incidents.” Musk actually requested "that the National Highway Traffic Safety Administration conduct a full investigation AS SOON AS POSSIBLE into the fire incidents." (my emphasis). That is, Musk didn't as for the investigation, but just that it be finished AS SOON AS POSSIBLE.

Mistake 2: "Pulling some data from the National Fire Protection Association gives us further color on just how exaggerated the overwhelming number of negative media responses to Tesla's fires has been."

Fact: An MIT study points out that only 4 percent of vehicle fires are caused by collisions. Tesla’s Model S sedan, with a rechargeable lithium-ion battery, is statistically more likely to catch fire in those incidents than cars with gasoline tanks, wrote Kevin Bullis, senior editor for energy for MIT Technology Review. One in 32,603 registered vehicles catches fire due to collision compared with 1 in 6,333 of the Model S.

I happen to drive a Chevy Volt. An interesting fact: The Volt fleet has driven over 520,000,000 miles, or about four times many miles as the Model S fleet. There has not been a SINGLE FIRE in all of those 520,000,000+ million miles driven by Volts. And Volts have been involved in some serious accidents, and I'm sure quite a few undercarriage strikes. ( http://solarvolt.wordpress.com... )

My conclusion: The Model S does have a design problem. It has a vulnerable battery pack covering nearly the entire bottom of the vehicle. Currently the NHTSA doesn't test for impacts with small road debris (e.g. a trailer hitch) because in other cars these types of impacts rarely, if every, result in fires or the vehicle being totalled. The Model S is the safest car based on NHTSA testing because NHTSA does not test for the Model S's weak point.

Disclosure: I am long TSLA, but sold most of my shares and have been playing with the house's money for several months now.

I was astonished when I read the part about how Musk "requested the investigation". Surely the author knows by now that Elon made "the request" after the NHTSB had already told Tesla that there was going to be an investigation. Elon has made numerous suspect comments on cash flow, safety, profits in the past and while the stock was the darling of the investment community and greenies the strategy worked. Again, it is shocking to see this discredited comment by Elon in print at this point in time.

Another incorrect statement in this article. Volt's HAVE had fires, albeit early on in the production years. Unfortunately this article and many more on the Fool have incorrect or unsubstantiated information. The internet stock pundit blogs and articles ARE NOT reliable sources of information.

The average Tesla S is about 4 months old and average of about 3000 miles. Comparing to an industry average of over 10 years with an average mileage of over 150,000 is absurd.

Lets compare to the 2014 Impala, which has been distributed since May 2. Over 50,000 produced. average miles of about 7,500. Checked last week, No known incidents of fire.

Compare to the ford Pinto. 3 million produced, 27 fires. That is one fire in every 111,112. Only about 9,000 Tesla S's have been sold in the USA. That makes it over 20 times more likely to catch fie than the Ford Pinto.

Thanks. I'm not saying that Musk is lying, but rather that you have to parse his words carefully. I take Musk's statement to mean that he is asking the NTSB to perform their investigation 'as soon as possible', not that Musk personally asked for the investigation to be started. (The typos in my original comment didn't help make this clear.)

@theOstrich: Being an early Volt buyer, I have been keenly aware of all major Volt accidents since the Volt was released 3 years ago. In over 520 million miles driven, not a single Volt accident has resulted in a fire.

There have been only 3 Volts involved in fires, and the fires were not caused driving accidents. The first Volt fire was caused by an NHTSA pole-impact-followed-by-rollover test in which the Volt didn't have it's fully-charged battery discharged (as should have been done after testing), and three weeks later the fully-charged battery caused short that caused a fire in the Volt that was stored in a parking lot.

Two other Volts were caught in garage fires in which the first 'was not the cause' of the fire and was 'probably not' the cause of the fire.

Like I said, the fact is that no Volt accident has resulted in a fire in over 520,000,000 miles of driving, which is nearly four times as many miles as the Model S fleet has driven. Two Model S's have caught fire after accidents (three if you count the Mexico accident). I'm not sure what Elon would make of this fact.

Second paragraph should start "....the fires were not caused BY driving accidents."

Third paragraph should read: "Two other Volts were caught in garage fires in which the first Volt 'was not the cause' of the fire and the second Volt was 'probably not' the cause of the fire, as determined by the investigating fire marshals."